Friday, 20 November 2015

Buy Today...BMO USD 2 year Bonds

I have USD cash earning absolutely nothing in my USD RRSP and I came across the following 2 1/4 year corporate bond priced in USD's.  So I bought $5K (minimum size).  This will pay me $73 per year and will mature at PAR in April 2018, which is better than nothing.



















For comparison's sake, here are 2 year USD GIC's:



















The only issue I have here is the spread.  TD kept 60 BPS in USD, which is disgusting, but I certainly am not going to buy 2 year USD GIC's at a whopping 45 BPS.

I look at this from the perspective of parking short term money, and earning something on the money (however small). As I continue to contribute new money to my registered accounts and I don't find new opportunities for deployment, I might as well earn something.  And the icing on the cake is that for minimal credit risk, I earn 3x more on short term money vs. no risk GIC's.

I suppose the question I should really be asking is, why not buy the common yielding 4.4% (3x the bonds)?  The answer is twofold, 1) I already own some BMO common in one of my accounts, and 2) valuation.  I'm a buyer of BMO common under $64 Canadian.  As we're trading around $77, I'm not interested in adding more.

My risk here is interest rate risk.  If USD yields spike up to 3% between now and April 2018, these bonds will trade lower.  As they mature at par in 2018, I'm really not that concerned.








7 comments:

  1. Have you considered some ENB US pay preferreds? Obviously, a lot more credit risk here and no maturity but Canadian dividend tax treatment and the dividend going up in a few years because the US five year has gone up meanwhile they have traded down in sympathy with Canadian pay rate resets which will have big dividend cuts.

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  2. Thanks kindly for commenting. I think the key elements to consider are credit risk and duration. I worry about both Enbridge and Transcanada in terms of credit risk, so I'm not particularly interested in either. I think they're both too big to fail, so in the event of a credit geared event, I'd be more preferential to buy the bonds if the prices were right, and right now, they aren't appealing to me.

    With the BMO bonds, I've kept my duration short enough, and I don't believe I have anywhere near the credit risk. Also, wrt dividend tax treatment, not relevant in this case b/c I hold the bonds in an RRSP

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  3. Thanks for responding. I missed the RRSP part until after I commented, sorry about that.

    In terms of equities, have you ever looked at IAM.TO? Seems relatively high margin of safety with the amount of cash on hand, large dividend and growing AUM should enhance profitability.

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    1. I just looked at IAM, seems like $16m cash (ignoring all other assets) less total liab's of $4m works out to about 46% of total capitalization, my question then, what's wrong with the story? Looks too good to be true...

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    2. I think it's even better than that because the proprietary investments are mostly in their own fund which can be liquidated on 30 days notice so add another $3.5m to the cash balance.

      I think the previous inconsistent profitability and low liquidity (high insider ownership and active buyback) have kept people away. That being said, the recent increase in AUM by 40% should be a game changer for consistent profitability and may lead to a quarterly dividend (at a higher rate).

      Take a look at this write up: http://seekingalpha.com/instablog/5449451-safety-in-numbers/4511746-integrated-asset-management-is-growing-under-the-radar-with-exceptional-return-potential

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    3. Have you ever considered some of the larger Cdn asset managers? For example, Gluskin Sheff comes to mind. No debt, and pretty consistent FCF's over the last 10 years. Senvest has come under pressure recently, more like a hedge fund than a traditional asset manager, with concentration in small caps.

      Read a great piece on Senvest here (albeit from 2013): http://www.oddballstocks.com/2013/04/anyone-can-invest-in-this-above-average.html

      Power Corp is another possible idea because it's got cross holdings in insurance and asset management, and likely trades at a discount to NAV.

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  4. Thanks kindly, I will research it. Best regards.

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